Mobile money is all the rage these days in inclusive finance circles, and for good reason. Mobile penetration has increased dramatically across the developing world over the previous decade, providing convenient rails for financial services to piggy-back on. It’s cheaper than Western Union and MoneyGram for the client, and cheaper than having to erect brick-and-mortar branches for banks. It’s faster than virtually any other method to send money to a relative in a pinch at the other end of the country, and safer than carrying cash around. And it has spawned an incredible array of services.

One of those is M-Shwari. It’s a savings-and-loan product offered by Safaricom in Kenya, in partnership with the Commercial Bank of Africa (CBA). M-Pesa clients can save into their M-Shwari account and earn interest, and take out short-term loans for a fee. It’s been hailed as a revolutionary product and discussed by the likes of CGAP, GSMA, NextBillion etc. highlighting fascinating aspects of mobile money adoption. And Safaricom promotes it as seamlessly blending convenience, safety and affordability.

I am totally sold on the “convenience” and “safety” elements of M-Shwari, but to buy the claim of “affordability” requires a somewhat unconventional understanding of that word.

But First, the Conventional Take …

So, how much does M-Shwari cost?

The details are in the terms and conditions, but the more readable version for the rest of non-lawyer types is in the FAQ.

Q: Do you get charged interest on your M-Shwari loan?

A: The M-Shwari loan DOES NOT attract any interest. The 7.5% charged is a loan facilitation fee payable only once for each loan taken.

Q: If you have not paid your loan within 30 days, what will happen?

A: Your loan repayment period will be extended for an additional 30 days and you will be charged an additional 7.5% facilitation fee on your outstanding loan balance.

Q: If you pay your loan before the due date, will you still be charged the loan facilitation fee of 7.5% on the loan amount?

A: Yes, the 7.5% is a facilitation fee charged on the cost of processing the loan. Early repayment will increase your future loan limit qualification. Remember your loan limit is dependent on your previous loan repayment behaviour and usage of other Safaricom services such as Voice, DATA and M-PESA.

That’s a 7.5% flat charge on the nominal loan amount, with a maximum term of a month. The nominal and effective Annual Percentage Rates (APRs), “annualized” interest rates if you like, are:

Nominal APR: 7.5% * 12 = 90%

Effective APR: (1 + 7.5%)¹² – 1 = 138%

For additional details/nuances on APR voodoo please refer to MFTransparency or Wikipedia. XIRR comes to 146%, assuming the 7.5% is collected when the loan is repaid, and 164% if collected when disbursed.

Calling it a “facilitation fee” doesn’t change anything – for a month-long loan, the effective annual cost to the client is 138% or so.

In fact, that it’s a flat fee makes things worse. There is a pretty good reason why the 7.5% can’t be called an interest rate, since interest rates are time-defined. If the cost was actually 7.5% per month, someone borrowing for a fortnight only would be liable for a 3.75% charge. Not so with M-Shwari – you could repay in a day, but you’d still pay 7.5%. The nominal and effective APRs for a twice-a-month engagement comes out to be 180% and 462% respectively; anything shorter, and the APR is astronomically higher.

We’re hovering dangerously close to the “u” word, don’t you think?¹

Conventional Carrot-and-Stick Included

Two other “features” jumped out from the FAQs:

Q: What is the loan duration?

A: The loan is payable within 30 days. However, you can repay the loan before the due date and borrow again. If you pay the loan in less than 30 days your loan limit qualification will increase.

Q: If you have saved Kshs 5000 in your M-Shwari and have a loan of Kshs 2000 and do not repay within the loan duration (30 days), what happens to the money in your deposit account?

A: – When you borrow the Ksh 2,000, the money in your savings account will be frozen to the loan amount and the loan fee (loan amount Ksh 2,000 loan plus a facilitation fee of Ksh 150).
– You will only be able to access any balance above the frozen amount. The frozen amount will be accessible once you pay the loan. However you can continue to deposit money. Note: During the period the frozen savings will continue to earn interest which will be paid into your M-Shwari at the end of calendar quarter.

M-Shwari thus encourages faster loan repayment, offering an increase in the loan limit as the carrot. CBA sweetens the language even further by noting, “The earlier you repay your loan the better your chances of getting your credit limit increased!”

M-Shwari also seems to be fully collateralized, with both principal and “interest” held in escrow. Good incentive for borrowers to repay, also because they run the danger of being reported as delinquent 90 days after the loan is due, and potentially ineligible for another loan in 7 years. (See CBA FAQ, pages 6-7.)

This is all well and good from a profitability and prudential lending point of view, but it could be argued that simultaneously making the current loan costly and increasing future indebtedness on one hand, and conducting a complete bait-and-switch between savings and credit balances so that there is no net increase in availability of funds to the saver on the other, are not inclusion-friendly “features”.²

The “Affordable” Case

There is no math that can known down the glaring APR of 138%. Context, however, can help explain why M-Shwari has 2.4 million active users within 1 year of operations. Here are some of the reasons I think it’s been so :

M-Shwari is primarily a savings product, with an option to take an emergency loan, as promoted by Safaricom and CBA. The maximum amount one can save is KES 100,000, but the maximum loan amount is KES 20,000.

People are willing to pay fees on short-term loans akin to a service fee. It’s why payday loans can charge $15 for every $100 borrowed in the US. People are also willing to pay a fixed, simple fee compared to a more complicated, constantly adjusting rate, which is why microcredit interest is often charged at a flat rate. There may also be an element of pay-as-you-go, where bank clients are willing to pay a transaction fee each time they use a service, as opposed to pay a fixed monthly ledger fee.

APR is not particularly useful for short-term loan products. No one expects a borrower to roll over 12 times in one year, bleeding KES 90 to access KES 100 through the year – we know even the unbanked are more sophisticated financial users than that.

But most importantly, it’s convenient – it’s on that phone that is attached to your hips, it’s on the M-PESA rails that is ubiquitous in Kenya, and it’s near instant, secure and private. I know I would pay a 7.5% premium for a service like that.

M-Shwari therefore seems to be “affordable” despite having an APR of 138%. With no cash-handling or client interaction costs at branches, a relatively cheap source of capital in deposits from the same clients³, and non-performing loans at around a low 3.8%, this is one partnership that must make for quite nice margins for CBA and Safaricom.

—

¹ The “u” word is usury, in case you’re still wondering.

² It’s not clear if one can borrow more than one’s savings amount – the product pages and FAQs are deliberately vague.

I finally got my hands on Lamia Karim’s Microfinance and Its Discontents: Women in Debt in Bangladesh, and it made for a great read. If you are interested in this field, you should check it out. I thoroughly enjoyed the narrative and appreciated her attention to detail in terms of laying out the context necessary to follow in her anthropologist’s footsteps, so to speak.

I think the biggest contribution this book makes to the field is providing another counter to the PR-ridden “microcredit is the silver bullet to poverty” storyline that has done as much harm to industry by setting up unrealistic expectations of what microfinance in general, and microcredit in particular, can and does do. For better or worse, anecdotes continue to play a strong role in shaping the perception of the utility of microcredit in the absence of rigorous quantitative proof either way, partly because pretty much every recent RCT has found no evidence of statistically-significant impact (as opposed to evidence of no statistically-significant impact …).

Check out Chapter 4 for the 7 narratives provided. 3 of them end up doing well, 4 of them – not so much. The complexity of each person’s life and the financial intermediation they have to undertake in the presence of other instruments amply illustrates the fallacy of relying on a linear narrative that draws a causal connection between providing credit and increased income.

Chapter 1 and Chapter 5 are nice contributions to discussions about the genesis of the NGO scene in Bangladesh, especially when it comes to those providing microcredit. There used to be four – Grameen, BRAC, ASA and Proshika. And then the fourth kinda went way overboard with what it was trying to do, and then there were three. Proshika’s story of demise is interesting in itself, but is also an example of the dangers of confronting interest groups within existing social hierarchies head on, as opposed to working with them as most others try to. Reading these chapters makes one appreciate the institutionalized impediments to development the microfinance industry had to overcome.

One should keep in mind a couple of things while reading this book though. The lion’s share of her work was done in 1997/98. So when the publisher says this book “offers a timely and sobering perspective on the practical, and possibly detrimental, realities for poor women inducted into microfinance operations” on the back cover, I’m not so sure about the “timely” bit. This is not to say that a lot of the societal dynamics are still not relevant today, but microfinance as an industry has come a long, long way in 15 years, as has the critical awareness of civil society and the media to developmental initiatives. It is virtually impossible to imagine that “house breaking,” for example, is sanctioned or possible on an industrial scale today.

There is also this sense of exploitation of women borrowers on an industrial scale, although this book’s various reviews are probably guiltier of overhyping this than the book itself. It is couched in a neoliberal narrative – one that has found particular traction amongst critics of microfinance. In so far as “neoliberal” denotes “more markets, less state,” microfinance is guilty of that charge. Unfortunately, Lamia Karim assigns predominantly negative characteristics to those who are successful in this “neoliberal” enterprise – they lived by the principles of “competition and rationality,” and “while NGOs construct female borrowers as entrepreneurs, the emergent neoliberal subjectivity that I encountered was that of the petty female moneylender. The female moneylender embodied all the competitive aspects of the neoliberal subject.” (p.p. 199-200)

She makes a similar case on how “introduction into private life has led to loss of social solidarity,” where “introducing loans into private life, NGOs have begun to weaken the kin-based bond of identification and family solidarity.” (p.g. 200). I think it’s fair to say that most practitioners would be very confused with the first statement, and point out that most processes of upward economic mobility has the effect of reducing family size and relationships becoming more nuclear. I won’t go through all the other things that I found similarly odd, but the chapter Conclusion is littered with them.

In summary, put a tinfoil hat on for the last chapter if you must, but the book is good – check it out.

Btw, spoiler alert: she’s part of the “microcredit is bad for poor people, mmkay?” crowd. Don’t let that detract from her message though – this stuff is worth keeping in mind so that we don’t have to deal with another AP-style disaster again.

A friend of mine recently forwarded me a recent publication titled The Limitations of Microcredit for Promoting Microenterprises in Bangladesh that appeared in the Jan-Mar 2012 edition of the Economic Annals. I sort of feel bad for picking on this one study but it’s somewhat representative of a few others I’ve seen where a couple of things just bothered me a brick ton.. Here’s a sampling. Apologies in advance to the authors; and I’m sure my turn will come soon enough

Claim 1:The field survey shows that about 11.7% of the microcredit borrowers are this kind of potential or growing microentrepreneur (Abstract).

Except, the survey this paper is based on was not randomly sampled (p.g. 43):

Samples were selected from urban (32.4%), semi-urban (27.2%), and rural (40.4%) areas, to ensure that microborrowers of different sized loans engaged in various categories of economic operations in rural and urban settings were adequately represented. In the absence of full knowledge of the structure and distribution of the microcredit borrower population in the country, random sampling as representative sampling is neither possible nor desirable (Molla and Alam, 2011). Moreover, in many situations random sampling is neither effective nor cost effective in serving the purpose for which sample data are collected. Purposive or judgment sampling is effectively used in such cases. Accordingly, a judgment sampling procedure was thought more effective and appropriate for this survey.

A couple of things:

The 11.7% is not representative of the universe of Bangladeshi microcredit recipients, but of the non-random sample used in the study. Indeed, unless the distribution of microcredit borrowers is exactly 32.4%:27.2%:40.4% over urban:semi-urban:rural areas, the number is anything but 11.7%. Not a lot of MFIs want to work in urban areas, specially slums, where a large proportion of the urban poor and ultra-poor live. Ask Shakti Foundation, one of the few MFIs that serve this challenging demographic. The real number could be 5%, it could be 20% – who knows..

I don’t buy the excuse that random sampling is not appropriate. By the authors’ own admissions, there are 15 million microcredit borrowers. (I think that’s a low ball number, but let’s go with it for now.) There are 150 million people in the country, including infants, the middle class, the elderly – demographics which are not obvious target populations of MFIs. You are almost guaranteed to hit a MFI borrower if you throw a … pillow a few times. Purposive or judgemental sampling is done when you are either targeting a very specific group and you don’t care about being representative, or there are so few of those you want to talk to that you have to search them out with deliberation. I can’t figure out how that could possibly be the case here.

I find the suggestion that “in the absence of full knowledge of the structure and distribution of the microcredit borrower population in the country, random sampling as representative sampling is neither possible nor desirable” quite counter-intuitive. Indeed, if one does not know the underlying distribution of borrowers, a random sample would have illuminated that unknown too, contributing to the findings of this paper. Also, one has to look at the big three – Grameen, BRAC and ASA- and one can guesstimate fairly accurately what the distribution is..

It would have made much more sense to present the findings in three silos – urban, semi-urban and rural, and share all the findings within those segments. It would have been more appropriate than as an aggregate too since, conceivably, the urban implications of microcredit on microenterprises is somewhat different from rural ones.

Claim 2:A sizeable chunk of all borrowers, microentrepreneurs or not, have issues with the terms of credit, which are inadequate for entrepreneurial purposes. (p.g. 47, my summary)

The entire para is as follows:

About 20.7% of all the borrowers and 15.4% of the microenterprise borrowers believe that they do not have the scope to effectively use the entire loan amount at the start of activities. In practice about 29.2% of all the borrowers and 20% of the microenterprise borrowers did not use the entire loan amount at the start of their business operations (Table 3). On the other hand, about 27.9% of all the borrowers and 55.4% of the microenterprise operators had to top-up the loan fund with personal or other borrowed funds to start operations. On top of that about 21.4% of all the borrowers and 8.6% of the microenterprise operators invested additional funds during the year, either from personal sources or from credits obtained from other microcredit providers. About 28.3% of all the sample clients and 40% of the microenterprise clients received multiple loans (2-3 or more) from 2-3 or more microcredit institutions.

I agree with the general thrust of the message. The rigid disbursement and repayment schedules are not conducive to the fluid needs of business, and borrowers often have to borrow from other sources to make up working capital shortfalls.

But the numbers I see here actually don’t seem that bad:

If 20% of borrowers don’t believe they can use the entire loan amount right away, then 80% believe they can, right?

Similarly, if almost 3/4 of borrowers and 1/2 of microentrepreneurs do not have to top-up funds right at the beginning, that’s not too bad, right?

Also, similarly, if almost 80% of borrowers and > 90% of microentrepreneurs did not have to invest additional funds, that’s not terrible either, right?

40% of the clients borrowing from multiple MFIs could be seen as a bad thing, but we have to be careful not to equate miltiple-borrowing with overindebtedness. PotP is chock full of examples which clearly demonstrate how sophisticated the poor are in their financial management, and Bangladesh was one of the study countries too.

I mean, it looks like microcredit is able to satisfy funding needs at various levels for 75-80% of borrowers in general and 50-90% of microentrepreneurs in particular, more or less. If we demand more, are we not holding microcredit to an unrealistically high standard, given the realities of the products and distribution channels?

Again, the bone I pick is not with the underlying message, but that the numbers put forward seem to weaken the case being made.

Claim 3:(The) preference for women as clients for credit is found to be a strong methodological limitation of the microcredit delivery system in promoting microenterprises. (p.g. 45-46)

The authors make a compelling enough case, up to a point. Men tend to run businesses in Bangladesh, and their survey shows how the female clients simply pass on the microcredit to their male counterparts. The respondents note the following as reasons for dependence on men (p.g. 45):

inability and lack of skill of the women borrowers,

more investment opportunities in man-relevant activities,

male-dominated family structure where male members maintain and control family,

social environment and custom where business activities are considered to be men’s work, and

women are not expected or respected in the domain of men’s activities (business activities)

So .. Why don’t MFIs simply lend to men? Blind ideology, or is this something based on reality?

Google “men microfinance” and you’ll get a ton of useful discussion, interspersed by a couple of good studies on this issue. The short answer is that we may not always know why, but men tend make for crappy borrowers. There is something in the woman-borrower/man-entrepreneur dynamic that “works.” (But may not always “work” in a way that is comforting – check out Lamia Karim’s work for societal dynamics gone bad.) Man-borrower-entrepreneur models don’t tend to work.

It is not constructive to simply take out the borrower intermediary when she clearly has something big to do with things.

It is also why SME lending has been so hard.

There are bunch of other things that gave me reason for pause, including:

The study relies too much on the Grameen model. BRAC and specially ASA do not do things like Grameen, and the results might be quite different for them. The authors may find that the “stereotyped microcredit delivery system” may have considerable variation within it.

There is no “counterfactual” to the claim that “microcredit is not sufficiently productive to generate enough revenue for interest payments if market rate wages are paid for family labour” for a significant portion of the borrowers. What if they did not borrow? Would they earn more? Would they starve?

It calls 25%-65% interest rates exorbitant, citing Bangladesh Bank lending rates of 4-5%, and commercial lending rates of 10-12% (p.g. 42). 65% could be considered exorbitant, but 25%? And most importantly, there are very, very real reasons why microfinance interest rates are so high. And it’s not because Grameen/BRAC/ASA are wannabe loan-sharks.

Its citations are .. unimpressive. One study used to comment on male-female gender dynamics is from 1996 – arguably an eternity in terms of the evolution of microfinance (p.g. 45). Commercial lending rates are quoted from 1997 (p.g. 42). More than half the references are the authors’ own, and the rest are mostly links to MFI reports.

Overall, this piece has decent analysis behind it. I think it gets into trouble trying to hammer out conclusions from it that are not adequately supported by the data.

By the way, if 11.7% of the (non-random) sample are microentrepreneurs of some stripe, what about the remaining 88.3%? What are they using microcredit for? If microcredit has limitations for “promoting microenterprises in Bangladesh,” what is it overwhelmingly succeeding in doing?